MNI INTERVIEW: OCR At 5.5% Before Pause - Ex-RBNZ Deputy Gov

The Reserve Bank of New Zealand will likely pause further rate hikes after it lifts the Official Cash Rate 25bp to 5.5% at the upcoming May 24 meeting, according to Grant Spencer, adjunct professor at the Victoria University of Wellington and former deputy governor at the RBNZ.

Spencer told MNI the Reserve will likely move the OCR to 5.5% then wait and monitor the flow through effects before moving further if needed. “The impression from the last statement seemed to be that it wanted to maintain pressure and further tightening was required,” Spencer said.

MNI reported last month the RBNZ’s focus would shift to employment figures, which would shape its May 24 decision, amid fears a recession may already be underway as the lagged effect of previous hikes hit mortgagees (see: MNI: RBNZ Focuses on Labour, Dovish Shift Likely - Ex-staffers). Data released today, however, showed the labour market remained strong, holding steady in the March quarter with unemployment at 3.4% (see: MNI BRIEF: RBNZ to Watch Strong Mar Quarter Employment, Wages).

SURPRISING RESILIENCE

Spencer said the resilience of New Zealand’s labour market surprised, but previous cycles showed lags between monetary policy and impacts on the economy. “I think the market is storing pressure that will become more evident in the second half of this year and into 2024,” Spencer added. “The Reserve will be aware of that, hence the need to pause at some point. Otherwise, it runs the risk of overdoing it.”

He noted a 5.5% OCR was potentially appropriate. “The markets and the economy seem very resilient, so I doubt the current level is overdoing it because it's clear this degree of pressure is needed to make an impact,” Spencer explained. “We haven't seen the full impact of the high rates, particularly through housing and disposable incomes.”

The higher rates have started to impact mortgages somewhat, however, with arrears up 26% in March from a year earlier to 19,300, or about 1.31% of total mortgages, Auckland-based credit bureau Centrix said last month.

HOUSEHOLD SPENDING

Spencer noted some tightening cycles impacted the New Zealand dollar more, but this was not happening due to the actions of other central banks. “So, the main transmission the RBNZ has to fight inflation is through the household sector and the housing market,” he continued. “It does take time for people to change their behaviour.”

The MPC’s attention will likely shift to household consumption leading into the next meeting, MNI understands. Quarterly retail sales figures will be published on May 23, the day before the next OCR meeting.